ABSTRACT: This paper models the disclosure of knowledge via licensing to
outsiders or fringe firms as a threat, useful in ensuring firms keep
their commitments. We show that firms holding intellectual property are
better able to enforce agreements than firms that don't. In markets
requiring innovation to make a product, IP disclosure presents a more
powerful threat than entry by the punishing firm alone. Occasionally, a
punishing firm won't be able to translate its intellectual property
into a full-blown product, making it impossible for it to enter the
cheating firm's market and punish. Even if it can't make a product
itself, the punishing firm can always credibly threaten to license the
intellectual property it has on hand to someone else. With this
intellectual property as a springboard, chances are at least one fringe
firm will be able to do the translation, make the product and enter the
cheating firm's market. In short, the potential for licensing
increases the likelihood of punishment for uncooperative behavior.In
the model, firms contract explicitly to ex-change knowledge and tacitly
to coordinate the introduction of innovations to the marketplace. We
find conditions under which firms can self-enforce both agreements. The
enforcement conditions are weaker when (1) firms possess knowledge and
(2) knowledge is easily transferable to other firms. The disclosure
threat has implications for antitrust law generally, which are
considered.